Spot Prices Holding, but There’s Carnage Among Gold and Silver Stocks; What Gives?

The prices for gold and silver aren’t advancing, but they’re not going down, either. If they just stay where they are currently, gold and silver mining companies should be able to generate solid revenues going into 2013.

One thing that’s apparent in the share price action of many gold and silver stocks is the lack of consistency within the group. While the industry itself is considered to be doing well, some companies are doing much better than others, and individual stock selection is crucial, even if gold and silver prices are going up.

We can see this divergence within the group perfectly among large-caps. Newmont Mining Corporation (NYSE/NEM), for example, has been struggling all year. Twelve months ago, this stock was at $65.00 a share; now it’s at $47.00. In contrast, Yamana Gold Inc. (NYSE/AUY) began this year around $15.00 a share, and has steadily increased to its current value at $19.00 a share, a point and a half below its 52-week high. There is a lot of similar trading action among many large-cap gold and silver mining companies, and the divergence of performance mostly has to do with costs.

Among smaller companies, very few gold and silver producers have done well on the stock market this year. Many of these positions can’t seem to advance on the stock market without robust production growth, combined with rising spot prices for gold and silver. One standout among gold producers with less than $1.0 billion in market capitalization is Argonaut Gold Inc. (TSX/AR), which trades in Canadian dollars on the Toronto Stock Exchange. The company recently reported excellent third-quarter numbers, and you would think that, given the company’s growth, its share price would have done better. Argonaut’s stock chart is featured below:

Chart courtesy of www.StockCharts.com

So, the big takeaway from this year’s experience with gold and silver stocks is that consistency of production and earnings isn’t enough to get share prices advancing in this group. What’s required for gold and silver stocks to advance is mostly appreciation in underlying spot prices, and that is the most difficult thing to predict as equity investors. It’s an investment risk that you can’t escape when dealing with commodity-related businesses.

Right now, we have spot gold around $1,730 an ounce, and spot silver around $33.00 an ounce. At these prices, gold and silver miners can make money. But, costs have been going up steadily within the industry, and operating margins are getting squeezed. Therefore, the pickings among the best gold and silver stocks worth owning in this market are actually very slim. Myself, I’d take an existing winner over speculating on a stock that’s down. Regardless, no gold or silver producer will advance meaningfully on the stock market without rising spot prices. This is the most important bet to make.